The inevitable pre-budget speculation on pensions

cfw1994

kinger101 said:

GunJack said:

ClashCityRocker1 said:

I think there is a case for reworking the whole income tax/NI system - probably taxing wealthy pensioners a bit more. But it would be a brave chancellor who did so, especially after saying they wouldn't.

But then what's a "wealthy pensioner"??

I think you can usually spot them by their attire. Brightly coloured trousers, shirt (not necessarily iironed) with a V neck sweater.  Though sports jacket and a tie on Sunday.

Usually drive a Volvo estate.

Hey! 

Nothing wrong with a Volvo 😂
(ours is a trusty 11yr old XC60, so technically an SUV, not estate…a magnificent vehicle, owned from new!).

hugheskevi

A few things that struck me reading this thread and all the gossip:

• There are 4.7 million uncommenced private sector Defined Benefit pensions - the typical person reaching retirement now has a combination of Defined Benefit and Defined Contribution pension, but the Defined Contribution pension is small.
• The public sector does not have huge pension pots with 6 figure lump sums, that is massively the exception rather than the rule. Most pensions are around the £10,000 p/a mark with an automatic lump sum under £30,000. Even taking into account other pensions and individuals taking more lump sum, the vast majority are nowhere near the limits. 
• There are exceptions in the public sector, notably in the NHS though, where pockets of the workforce would be affected. Even with the 12:1 commutation rate, someone who is going to be paying higher rate tax in retirement is going to be seriously considering taking lump sum if they commence the pension at around 65. There would need to be careful workforce handling considerations for the various pockets of public sector workforce affected. Still, the impact on them is much lower than the private sector with DC as the public sector DB schemes have already had their tax free lump sum effectively removed via the poor commutation rates.
• A vanishingly small proportion of the population is currently affected by the £268,275 Lump Sum Allowance. It might be an issue for future generations due to fiscal drag, but it is going to be the least of concerns for those people at this time.
• A reduction to £100,000 would be highly likely to come with protection to avoid retrospective taxation, as the previous 3 reductions to the tax-free limit during the 2010s and the change in 2006 did. That would protect those close to retirement, but those further away would not get protection due to their pots currently being below the threshold, and having to opt-out of all future pension accrual to retain the current limit is unlikely to be attractive for the vast majority - only those who have amassed a large pot early in life but do not plan to add much more in later life.
• In most of the articles I've seen, discussion of likely protection is minimal, if mentioned at all. 
• There is quite a bit of interesting discussion about the recent FCA/HMRC clarification that lump sum decisions should not be reversible once made, following some individuals trying to protect against policy change in budgets by putting in lump sum requests before Budget that can then be reversed afterwards if policy change risk does not materialise.
• Of those who would be affected, many would be taking UFPLS, and so a reduction would have a gradual effect on income for the Treasury, rather than an immediate windfall from new retirees taking big withdrawals from their pension. Taking into account protection and the gradual revenue increase, the higher revenue in this Parliament is likely to be rather small.

ali_bear

kinger101 said:

GunJack said:

ClashCityRocker1 said:

I think there is a case for reworking the whole income tax/NI system - probably taxing wealthy pensioners a bit more. But it would be a brave chancellor who did so, especially after saying they wouldn't.

But then what's a "wealthy pensioner"??

I think you can usually spot them by their attire. Brightly coloured trousers, shirt (not necessarily iironed) with a V neck sweater.  Though sports jacket and a tie on Sunday.

Usually drive a Volvo estate.

Phew - just dodged that bullet! 

michaels

hugheskevi said:

A few things that struck me reading this thread and all the gossip:

• There are 4.7 million uncommenced private sector Defined Benefit pensions - the typical person reaching retirement now has a combination of Defined Benefit and Defined Contribution pension, but the Defined Contribution pension is small.
• The public sector does not have huge pension pots with 6 figure lump sums, that is massively the exception rather than the rule. Most pensions are around the £10,000 p/a mark with an automatic lump sum under £30,000. Even taking into account other pensions and individuals taking more lump sum, the vast majority are nowhere near the limits. 
• There are exceptions in the public sector, notably in the NHS though, where pockets of the workforce would be affected. Even with the 12:1 commutation rate, someone who is going to be paying higher rate tax in retirement is going to be seriously considering taking lump sum if they commence the pension at around 65. There would need to be careful workforce handling considerations for the various pockets of public sector workforce affected. Still, the impact on them is much lower than the private sector with DC as the public sector DB schemes have already had their tax free lump sum effectively removed via the poor commutation rates.
• A vanishingly small proportion of the population is currently affected by the £268,275 Lump Sum Allowance. It might be an issue for future generations due to fiscal drag, but it is going to be the least of concerns for those people at this time.
• A reduction to £100,000 would be highly likely to come with protection to avoid retrospective taxation, as the previous 3 reductions to the tax-free limit during the 2010s and the change in 2006 did. That would protect those close to retirement, but those further away would not get protection due to their pots currently being below the threshold, and having to opt-out of all future pension accrual to retain the current limit is unlikely to be attractive for the vast majority - only those who have amassed a large pot early in life but do not plan to add much more in later life.
• In most of the articles I've seen, discussion of likely protection is minimal, if mentioned at all. 
• There is quite a bit of interesting discussion about the recent FCA/HMRC clarification that lump sum decisions should not be reversible once made, following some individuals trying to protect against policy change in budgets by putting in lump sum requests before Budget that can then be reversed afterwards if policy change risk does not materialise.
• Of those who would be affected, many would be taking UFPLS, and so a reduction would have a gradual effect on income for the Treasury, rather than an immediate windfall from new retirees taking big withdrawals from their pension. Taking into account protection and the gradual revenue increase, the higher revenue in this Parliament is likely to be rather small.

This is what worries me, I am one of the edge cases, never earned much over the higher rate tax threshold but spent less to retire early and went for an io mortgage with the capital payments going into the pension and planning to use the tfls of about 200k to pay off the mortgage. If that was reduced to 100k then I pay an extra at least 20k tax and possibly more if I can't drawdown the mortgage money over several years.

And being one of apparently only a few it is less likely that they will offer protection.

Cobbler_tone

hugheskevi said:

A few things that struck me reading this thread and all the gossip:

• There are 4.7 million uncommenced private sector Defined Benefit pensions - the typical person reaching retirement now has a combination of Defined Benefit and Defined Contribution pension, but the Defined Contribution pension is small.

Count me in, although doing my best to accelerate the DC pot. In 2021 (when the DB closed) I had a model that showed I could be £300k 'worse off' if I worked to 65, I was 52 at the time.
If I have learnt anything, it is that life and the world changes very quickly and I am in a position to bridge that to an extent. I quite like the idea of having both, although it is costing me more today. It was great whilst it lasted and new members were blocked in 2009.

kermchem

hugheskevi said:

A few things that struck me reading this thread and all the gossip:

• There are exceptions in the public sector, notably in the NHS though, where pockets of the workforce would be affected. Even with the 12:1 commutation rate, someone who is going to be paying higher rate tax in retirement is going to be seriously considering taking lump sum if they commence the pension at around 65. There would need to be careful workforce handling considerations for the various pockets of public sector workforce affected. Still, the impact on them is much lower than the private sector with DC as the public sector DB schemes have already had their tax free lump sum effectively removed via the poor commutation rates.

A really useful analysis and insight. I have kept only one bullet point to quote. I think this probably applies to just about every NHS consultant over 55. The budget proposals are going to need to ensure that the country is not faced with every single one of them retiring in January 2006.

My other comment is that most of what hugheskevi has said seems to result in nothing useful to fill the £20, £30, £50 billion pound blackhole in the country's finances this/next year. Making changes (small, medium or massive) to the UK pension saving culture should not really be on the Chancellor's work list this week if they are not going to fix her cash flow next week.

Albermarle

aroominyork said:

Albermarle said:

aroominyork said:

In the run-up to last year’s budget there was forum chat about whether the expected rise in CGT would happen overnight. The majority thought it would probably kick in the following tax year. Anyone who sold assets just before the budget on the basis they could B&B them back if the rise was delayed, is free to have a little gloat here.

Now we have the same dilemma ahead of 26 November about the tax-free lump sum – which is not B&B-able. Given the ease of arranging to take your full TFLS the day after the budget, isn’t it likely that any change would be immediate, eg capping the TFLS at say £100k, with no penalty for higher amounts taken before budget day?

Is it also likely that tax-free withdrawals by your heirs if you die under 75 will be in the Chancellor’s sights, as she wants to stop pensions being used as an inheritance planning tool? It is sometimes written that heirs would be taxed twice if they paid income tax on withdrawals from inherited pensions after the estate has already been subject to IHT. I don’t agree. Ignoring the heir’s 25% TFLS, the amount they draw down is 60% of the legator’s net contribution, so it is a straight IHT deduction. If there is no IHT, the heir’s withdrawal after tax is the same as the legator’s net contribution. This example assume 20% tax at both ends.

Finally, if any finance journalists are reading this, can I plead with them to try not to use the term ‘grieving families’ in every paragraph they write on the subject.

Just to go back to the OP. Unfortunately it will not copy over the little spreadsheet they included in their post.

I just wanted to make the point that even if the estate ( including the unused DC pension pots after 2027) was liable for IHT, it is unlikely to be levied at 40% on the whole pot.

For example if it was the second death of a married couple and the estate consisted of a £300 K unused pension pot, a £400K family home and £400K other assets.
Family home is left to the children, so overall £1M in nil rate band available .
Overall estate is worth £1.1M, so 40% tax due on £100K .
If this was split proportionately between the pension and other assets, the pension would have to pay approx £18 K , an effective IHT rate of approx only 6% .
I think in the legislation the Executor would have some discretion where to pay the tax from, but to make it somple I just stuck to a proportional payment.
Even if the estate was in the £2million pound area, in theory any unused pension pot that was part of that would only effectively pay 20% IHT if was done proportionately.

I am seeing “Content not viewable in your region” both on your post and my original one. I live on the south coast and haven’t seen the French storming our shores so I expect it is an MSE glitch.

My figures were:

IHT paid: £80k net pension contribution by legator… £100k grossed up… £60k after IHT… £48k when taxed on drawdown.

No IHT paid: £80k net pension contribution by legator… £100k grossed up… £100k after IHT… £80k when taxed on drawdown.

Thus, the net amount received by the beneficiary is the same as the net amount paid in by the legator, reduced only by 40% IHT when applied.

As you rightly say, Albermarle, in many cases the estate excluding the pension would not be over £1m so the SIPP would not be fully taxed at 40%. You raise an interesting question of which assets would be taxed if the SIPP remained ringfenced and I wonder whether the Executor would be required to consult the beneficiaries. Young beneficiaries might want less cash now rather than more money tied up in a pension; older ones might feel differently. If the beneficiaries are from different generations… light the blue touchpaper and stand back.

Also it could be that the beneficiaries stated in the will ( that would cover non pension assets),  and the beneficiaries stated in the pension Expression of Wish form could be different.
So the Executor would have plenty of sensitive decisions to make regarding where to pay any IHT due ....

kinger101

I still think they'll default to the easiest option of extending fiscal drag.  The vast majority of the public notice it much less than anything else   

Though they do love a decisive us and them narrative, as we've seen with farming, private schools and landlords 

kinger101

cfw1994 said:

kinger101 said:

GunJack said:

ClashCityRocker1 said:

I think there is a case for reworking the whole income tax/NI system - probably taxing wealthy pensioners a bit more. But it would be a brave chancellor who did so, especially after saying they wouldn't.

But then what's a "wealthy pensioner"??

I think you can usually spot them by their attire. Brightly coloured trousers, shirt (not necessarily iironed) with a V neck sweater.  Though sports jacket and a tie on Sunday.

Usually drive a Volvo estate.

Hey! 

Nothing wrong with a Volvo 😂
(ours is a trusty 11yr old XC60, so technically an SUV, not estate…a magnificent vehicle, owned from new!).

Nothing wrong with a Volvo.  Built to last.  But red trousers?

aroominyork

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals?